2010-09-27

Debunking bubble economies - Canada pt4 - David Rosenberg weights in

Bubble or not, our analysis found that every basis point of the Canadian economic recovery was due both directly and indirectly to the boom in the housing sector. That goose is no longer laying any golden eggs.

In fact, from the nearby peaks, single-family housing starts have plunged 32%, residential building permits have sagged 17% and home prices, on average, are down 6% from their once-lofty levels. In the absence of an export resurgence, which seems unlikely given the ongoing sluggishness in the U.S. economy, the turndown in housing and the commensurate “spill-over” effects are bound to keep the pace of domestic activity rather sluggish in coming quarters.
[…]
At the same time, housing deflation and a rising tide of mortgage delinquencies will bite into CMHC reserves and, at the margin, undercut the quality of seemingly pristine Canadian banking sector balance sheets — where $500 billion of residential real estate loans reside (representing 30% of total bank assets).

The OECD released a damning report on the state of Canadian consumer finances and concluded that they are extremely vulnerable to any adverse shocks — including the lagged effects of even a moderate rate-hiking cycle on mortgage refinancing costs.
[…]
Even if it wasn’t a bubble, it looked like a giant-sized sud — excessive leverage, overvaluation and widespread participation are the three classic hallmarks.